How Dangerous can a Personal Loan be During a Period of Slow Growth?
Despite the Government’s well-publicised initiatives to attempt to get the UK economy back on track, it seems that the banks are still dragging their heels. Recent figures released show that banks still seem to be reluctant to hand out personal, business and home loans.
The Telegraph recently reported that the interest rates on personal finance are at an all-time high, even though the Bank of England (BOE), interest rates have been kept at a record low.
While the BOE have kept interest rates at an historic low for the past two years, the average rate of interest offered by banks on a £5,000 personal loan is a whopping 12.7 per cent.
The last time that personal loan interest rates were at the same level was in May 2000, when the BOE interest rates were much higher at six per cent. From this we can safely deduce that the banks have increased their profit margins on personal loans significantly.
Of course, this is part of the ripple effect of the economic crisis which saw banks financially crippled by lenders defaulting on personal, business and home loans. Years of irresponsible lending and a blasé attitude to borrowing finally backfired in spectacular fashion.
While the banks were partly to blame for their irresponsible lending, it seems that it is the common customer who is suffering the fall out. High interest rates on personal loans can be impossible to manage in such times of financial hardship.
Household budgets are being squeezed ever tighter and the excessive interest rates of personal loans are sure to put off sensible customers. This causes the economy to stall even further and a vicious circle is formed.
The situation has been further exasperated by April’s court ruling on Payment Protection Insurance (PPI), which will see the banks paying out millions in customer compensation.
PPI policies are often sold alongside loans as a means of security, for both the bank and the customer. These insurance policies are designed to repay loans in the case of a customer suffering a significant drop in income due to unemployment or illness. They have provided a valuable lifeline for some in times of financial dire straights.
Unfortunately, the reputation of PPIs (and the banks peddling them), has suffered a massive blow due to blatant miss-selling which saw many customers saddled with expensive policies that they didn’t need, want, or, in some cases, were even aware that they had. This means that customers are now suspicious of PPIs and take up is low.
With no PPI in place, customers are even more of a risk to banks than previously; particularly in the current climate of job insecurity.
Unfortunately, while the PPI ruling is a consumer victory on the surface, all that is happening is that the banks are passing on their resulting losses in revenue to customers in the form of higher interest rates.
The banks' reluctance to take any risks with their lending is not confined to personal loans alone. The Guardian recently reported that the UK’s top banks are also dragging their heels when it comes to lending to businesses.
Despite an agreement between the banks and the government to increase lending to businesses (to the tune of £76 billion this year), and hopefully bolster the economy, the banks are revealed to be failing to hit these targets by a significant amount.
This was good news for struggling small and medium sized businesses, but unfortunately the banks are already around £3 billion short of their lending targets.
The message from the banks is clearly that they’re not ready to get their fingers burnt through lending again; yet it is customers and small business that are suffering from the lack of available funding.
Sky-high interest rates and reluctance from lenders, is making borrowing a difficult task. However it can be made easier by using a good online financial site to compare rates and gauge suitability for certain lenders ahead of any planned applications.